The US dollar continues to bleed following additional comments from Fed officials

The US dollar index continued to bleed in yesterday’s session (falling around 0.70 percent) after comments from Fed officials Evans, Rosengren, and Bostic, and the FOMC minutes that showed the committee to be in sync with Fed Powell’s message last week related to patience on rate hikes. Fed Bostic’s comment that the next move in rates could be up or down saw the EUR/USD pair finally break the 1.1500 handle. Some money flow reports show that there was aggressive buying of Euros, despite fears of a possible recession ahead for Germany, which is also pushing an already weak US dollar lower.

The United States Trade Representative released a statement that the trade negotiations were focused on China’s pledge to buy more US agriculture, energy, and manufactured goods to cut the US deficit. This does not address the more significant issues like IP theft or domestic subsidies, but it might be enough for now as Trump fights his border battle. On that front, Trump’s address to the nation did little to resolve the issue around border security, while his meeting with Nancy Pelosi and Chuck Schumer ended with Trump walking out abruptly calling it a “waste of time.”

The FOMC Meeting Minutes yesterday showed that volatile markets and muted inflation added to arguments for the Fed to take a gradual approach to lifting interest rates further in 2019. At the same time, market participants are becoming more reluctant to give the Fed’s policy plans the benefit of the doubt, because the Fed might look to implement two further hikes this coming year; however, the market is now pricing in less than a 50% chance of any hike.

The Bank of Canada maintained its target for the overnight rate at 1.75 percent, as the consensus was expecting. There were no surprises, so the USD/CAD pair did not have more volatility after the fact, The most volatile moment was between one hour before and one hour after the announcement, where the pair traded between 1.3180 and 1.3248. At this moment, it is trading at 1.3215 along with a sideways crude WTI price, which moved 0.25 percent lower in a typical price consolidation movement. It is waiting for more news to pick a direction.

The BoC mentioned that the rate normalization would happen “over time,” and also that the Canadian economy has been performing well overall. Growth has been running close to potential, and unemployment is at a 40-year low. The BoC also pointed out that looking ahead, exports and non-energy investment are projected to grow solidly, supported by foreign demand, the CUSMA, the lower Canadian dollar, and federal tax measures targeted at investment.

The BoC did allege risks from oil and housing however. They stated that housing investment has been weaker than expected, as housing markets adjust to municipal and provincial measures, changes to mortgage guidelines, and higher interest rates. Furthermore, household spending will be dampened further by the slow growth in the oil-producing provinces. Regarding the oil concern, it seemed misplaced with oil WTI now in a bull market. The next interest rate decisions are on March 6th and April 24th.

As is almost always the case, US dollar weakness has seen the Euro rally over the past 24 hours, and it seems like the EUR/USD may have finally broken out of its 1.1250 – 1.1500 range seen since mid-October. With many analysts predicting an end to the dollar run you would be forgiven for thinking a gradual push up to 1.20 could be on the cards for the shared currency; however, a slowing in Eurozone inflation and some concerning data emanating from Germany may put the brakes on the euro's advance. Indeed, after hitting a high of 1.1570 overnight, we are now back down to 1.1525. The next move higher or lower may come from this lunchtimes publication of the European Central Banks minutes from its last policy meeting; the print is due at 12:30pm.

Theresa May suffered yet another setback yesterday with regards to her Brexit strategy as MPs voted in favor of limiting the amount of time allowed for another plan to be voted on to three days, rather than the three weeks usually allowed under parliamentary rules. It is widely expected that May’s withdrawal agreement will be defeated on Jan 15th, and the development means there is less time for May to get further concessions from the EU if this does materialize. The decision by Speaker of the House, John Bercow, to allow the vote on limiting the time allowed was widely derided by May supporters who accused him of setting a dangerous precedent by allowing backbenchers such influence over government policy. It should also be noted that any plan B, C, or D they may come up with will not have the approval of Brussels. GBP/USD continues to trade in its weekly range between 1.27 and 1.28; it currently sits around 1.2757.

Yesterday’s risk-on rally has come to an end with global equity markets lower this morning. Markets were hoping for a breakthrough with regards to the China/US trade talks and the US government shutdown, however, no concrete news has come from Beijing. The AUD/USD pair is trading at 0.7186 at the time of this writing, very close to significant technical support. Tonight’s Retail Sales figures from Australia may provide the impetus for another move above the 0.7200 handle, however, the commodity currencies’ movements are generally dictated by global risk sentiment rather than domestic numbers at present.

The Kiwi has mirrored the Aussie Dollar’s move lower over the past day, with a halt to its advance provided by the risk off environment enveloping markets overnight. There is no data from New Zealand for the rest of the week, so external factors will continue to be the primary driver of the local dollar. The NZD/USD pair is trading without changes at 0.6785.

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